GDS Holdings Ltd

HKEX:9698

Earnings Call Transcript 2019-Q4

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.

[Laura Chen, executive]

Hello, everyone. Welcome to the 4Q '19 and Full Year '19 Earnings Conference Call of GDS Holdings Limited. We are deeply sorry to keep you guys waiting for so long, but we just had some technical issues last minute with -- so far, our release with the SEC. So we assure you that everything's fine. The company's results were issued via Newswire services earlier today and are posted online. A summary presentation, which we'll refer to during this conference call, can be viewed and downloaded probably soon from our IR website at investors.gds-services.com.

Leading today's call is Mr. William Huang, GDS Founder, Chairman and CEO, who will provide an overview of our business strategy and performance. Mr. Dan Newman, GDS CFO, will then review the financial and operating results. Ms. Jamie Khoo, our COO, is also available to answer questions.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus as filed with the U.S. SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that GDS' earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to GDS Founder, Chairman and CEO, William Huang. Please go ahead, William.

[William Huang, executive]

Hello, everyone. This is William. I'm here in Hong Kong with Dan and Jamie. Thank you for joining us on today's call.

With all the recent developments, 2019 feels like a long time ago, but please allow me to begin by talking about our great achievement last year. First of all, we hit our sales target, adding over 81,000 square meters or 174 megawatts of new customer commitments. When fully delivered, this will add RMB 2.4 billion or USD 345 million of annual recurring revenue. We expand the data center capacity in line with sales, adding over 90,000 square meters in service and under construction. In addition, we expanded our development pipeline. We currently have over 320,000 square meters secured for future development, which is far more than anybody else in the market. It's very valuable and key to our continuing success.

All of our sales and all of our capacity additions were in Tier 1 markets. Our financial results were impressive. We grew revenue by 47.6% and adjusted EBITDA by 74.3% year-over-year. With this guidance on both metrics, our adjusted EBITDA margin came out nearly 7 percentage points higher. We raised USD 900 million of equity to ensure that we can keep on growing at the current pace or faster.

Furthermore, we established an innovative, strategic partnership with GIC, which expands our addressable market and gives us access to an alternative source of equity.

Let's turning to Slide 5. Demand was consistently strong throughout 2019. What is driving this? First and foremost is cloud adoption. AliCloud, the market leader, reported over 60% revenue growth for the last quarter. Tencent Cloud just reported nearly 90% growth. The cloud in China is still at an early stage in terms of penetrating large enterprises. In addition to cloud, we have recently started to see our customers gearing up in anticipation of 5G takeoff.

Let's turning to our customer franchise on Slide 6. The major highlight is expansion of our hyperscale customer base. On the one hand, demand from our top 2 customers was very well sustained and continues to drive around 50% of our sales. On the other hand, we made breakthroughs with several key accounts. As a result of which we are now a significant service provider to almost all of the hyperscale customers in China. The winning factors are our multimarket platform, continuous supply, long-term track record, reputation for operational excellence, transparency and financial stability. These are the differentiators which have taken years to develop and are not easily matched. We believe that our market share has increased in Tier 1 markets. With our current customer mix, we are pledged into growth across the digital economy.

In addition to hyperscale, we added some highly prestigious new logos. In the last quarter, we signed a master sales agreement with Apple and won our first business from PayPal. We entered this year with great sales momentum. As a result, we have raised our sales target for 2020 to 100 square meter net add, made up of 80,000 square meters organic growth and a 20,000 square meters from the pending acquisition in Beijing. This target does not reflect any flow-through from increased usage of digital services in the current period. In 1Q '20, we are on track to achieve comfortably over 20,000 square meters net add, and the next quarter also looks very strong. This demonstrates that customers are not holding back. We expect to make a lot of progress towards the 100,000 target by the middle of the year.

Turning to the Slide 7. Not only is demand strong, it is also very noticeable that customers have changed their approach. They are precommitting earlier to secure their supply. This is reflected in the upward trend in our precommitment rate. In reality, almost everything that we do is driven by specific customer requirements.

On Slide 9. As we have been saying for a while, the biggest challenge is keeping up with demand in Tier 1 markets. To deal with this challenge, we have evolved our approach to project sourcing in 3 major ways. First, because of the restructuring of data center development in urban areas, we have established a supplementary presence at the edge of town, such as Langfang to serve Beijing and Kunshan and Changsu to serve Shanghai. Second, we have increased our property ownership, existing buildings in urban areas and the greenfield land at the edge of town. We now own over 50% of our entire capacity, including the development pipeline. As compared with around 20% at the end of 2018, increased ownership gives us much more flexibility and the certainty of supply. And third, we have put tremendous efforts into building up our pipeline of future projects. We aim to have at least 3 years' supply in each market and have made great progress towards this goal. The change of approach is already yielding great results.

Let's move to Page 10. Take Langfang as an example on Slide 10. It's 50 kilometers from Beijing and the viable edge-of-town location due to the existing concentration of carrier data centers. We selected Langfang with the endorsement of our top customers and have spent a long time working with the local government on a framework agreement for power, land and investment. 1 year ago, we had nothing in Langfang. As of today, we have 30,000 square meters of capacity in service and under construction across 5 data centers, all of which are 100% committed by our top customers, and we have secured another 83,000 square meters of developable capacity. We aim to repeat this success in other Tier 1 markets.

Another way in which we have evolved our approach is with regard to acquisitions. We started off a few years ago, viewing M&A as a means of adding to our supply. Now we also view it as a way of increasing our presence in key locations, expanding our relationship with strategic customers and accelerating our growth on very accretive terms. We have stepped up our M&A efforts. And if the opportunity allows, we aim to do more deals. We are actively pursuing several deals -- targets.

Before I hand over to Dan, I would like to say a few words about the current situation. From the offset of the coronavirus epidemic, our top priorities have been to ensure, number one, to safety -- the safety and the well-being of our employees and of the people we interact with; and the second, incident-free operations. So far, I'm pleased to say we have achieved both of our goals with 0 infections and 0 SLA breach. It has not been easy. We made many changes to our policies, procedures and communications, but the business continuity is where we come from. It's part of our DNA. The steps that we have taken have been very much appreciated by our customers. We received a lot of positive feedback.

It's at a time like this that you get tested, that the quality of our operations set us apart, that the customers remember why they do business with us. Our reputation has been enhanced. Coming into 2020, we felt that our market position and the capabilities had got a lot stronger over the past year. While the opportunity in front of us keeps getting bigger, the virus epidemic is a tragedy, and our thoughts and prayers are with all those who have been affected.

During this tough time, digital service has played a critical role. We have all had to change our behavior, and this may result in a structural shift in how we live and work. The importance of the underlying infrastructure has been recognized at the highest level of the Chinese government and may result in favorable new policies. We are waiting to see the specifics. However long it takes to get through this period, we believe that the fundamental of our market position and opportunity will remain intact, if not stronger.

With that, I will hand over to Dan for the financial and operating review. Thank you.

[Daniel Newman, executive]

Thank you, William.

Starting on Slide 15, where we've stripped out the contribution from equipment sales and the effect of FX changes. FY '19 finished strongly, and I'm pleased to say that we beat our guidance for revenue and adjusted EBITDA. In 4Q '19, our service revenue grew by 9.5%, underlying adjusted NOI grew by 7.4% and underlying adjusted EBITDA grew by 8.8% in consecutive quarters. Our underlying adjusted EBITDA margin was fractionally down in the last quarter at 45.6%. However, for the full year, our underlying adjusted EBITDA margin was substantially higher at 44.7% compared with 37% in FY '18.

Turning to Slide 16. Service revenue growth is driven mainly by customers moving in to the space which they previously committed. Move-in during 4Q '19 was 18,000 square meters, including 7,800 square meters from BJ9. BJ9 is an acquisition which we entered into last year. It is not closed yet pending a final CP. As an intermediate step, the existing customers have entered into new contracts directly with us, and we have taken over operations of the data center under a management contract. Our MSR was quite stable over the course of 2019. However, we expect a slight drop in 2020, mainly due to customer and location mix, acquisitions and the timing of move-in.

Slide 17 shows the quarterly trend in margins. In 4Q '19, underlying adjusted NOI margin decreased by 1 percentage point, mainly due to 45,000 square meters of new capacity coming into service in the last 2 quarters. In addition, under the BJ9 arrangement, we are getting a low double-digit profit margin until the deal closes, which is a slight drag. The decrease was partially offset by leverage on SG&A, which went down to 7.8% of service revenue compared with 8.4% in the prior quarter. Adding all up, our 4Q underlying adjusted EBITDA margin was just 0.3 percentage points lower. For FY '20, we expect around a 1 percentage point improvement at the NOI level and a further 1% from leverage on SG&A, but the quarterly trend could be a bit up and down.

Turning to Slide 20. Our total CapEx in FY '19 was CNY 5.3 billion, including CNY 1.5 billion related to acquisitions of data centers, property and land. In 4Q '19, we paid for the Hong Kong 2 site, the Shanghai 14 building and most of the consideration for the Guangzhou 6 acquisition. Up to the end of last year, we also paid out RMB 270 million for build-to-suit joint venture projects, which will be reversed when we sell the 9% equity interest to GIC.

The majority of our CapEx consists of plant and equipment, which is essentially the same in each data center, and the cost is easily benchmarkable. We've been able to reduce our unit CapEx for P&E by 3% to 4% per annum over the last few years and expect to continue doing so. The remainder of the CapEx relates to the building which can be leased or owned and to the external power infrastructure. The unit CapEx for this part can vary depending on the specifics of each project, but on average, has stayed at around the same level.

On Slide 22, we ended 2019 with gross debt of RMB 16.2 billion or USD 2.3 billion, around 80% of which was in the form of mostly local currency-denominated project term loans and finance leases. This debt is structured to fit around project cash flows and is substantially covered by our multiyear contracts with investment-grade customers. The term loans are covenant-light or have no covenant at all. The remaining 20% of our debt is made up of the CB at holdco level, which is unsecured and has a remaining term of over 5 years, and of working capital facilities which we have rolled over numerous times. In 2020, we are guiding for RMB 7.5 billion of CapEx, which is elevated due to payments for pending data center and property acquisitions. Assuming a conservative financing ratio of 40-60 equity to debt, we will need RMB 3 billion of equity and RMB 4.5 billion of debt to finance our CapEx. For the equity part, we are sitting on CNY 5.8 billion of cash, thus we expect positive operating cash flow this year.

For the debt part, most of the facilities are already in place. We have RMB 2.5 billion committed but undrawn, leaving about RMB 2 billion, which we are working on right now across 7 facilities with local and foreign banks. To put this remaining requirement into perspective, last year, we've secured nearly RMB 6.5 billion of new debt facilities. The banking market in China is very supportive. We have a great track record as a borrower and have developed great banking relationships. I can see no reason at all why this should not continue.

Finally, we established partnerships with Ping An and GIC to ensure that we have access to diverse funding sources and are not reliant on the public market. Regardless of the current situation, we are always considering alternative funding options with these and other potential partners to optimize our capital structure and cost.

Turning to Slide 23. Our contract backlog has been increasing each quarter. We ended FY '19 with 108,000 square meters, equivalent to 70% of our revenue-generation area. Part of the backlog relates to data centers in service. The amount has remained in the 40,000 to 50,000 square meter range over the past 5 quarters, driving organic move-in of around 10,000 square meters per quarter, which implies about a 4- to 5-quarter move-in period. The remaining part of the backlog relates to data centers under construction. The amount has increased significantly from just over 31,000 square meters at the end of 2018 to just over 57,000 square meters at the end of last year. There are 2 reasons for this. One, as William mentioned, customers are precommitting earlier and to a much greater extent; two, as you can see from the table on Page 21, we're undertaking more greenfield projects where the construction period is around 6 months longer. As the backlog-related to data centers in service increases, we would expect the quarterly move-in to increase. However, this is subject to the timing of project completion and other factors in the current uncertain operating environment.

To finish on Slide 24 with our guidance. We are nearly at the end of the first quarter of 2020. So before I talk about our outlook, I should mention what we have already seen in the year-to-date. The COVID-19 epidemic is affecting us in 2 main ways: construction and move-in. At the end of January, construction across our 16 self-developed and build-to-suit projects came to a halt for Chinese New Year and did not resume until recently due to government restrictions. We are not experiencing significant problems with our supply chain as we had placed orders well in advance. Nonetheless, we've lost a couple of months which we will try to make up. The kind of delay which we've experienced will not materially impact our financial results in the current year.

Move-in is a much more material issue in the short term as it's the primary driver of our revenue and profit growth. The first quarter is usually a seasonal low for our business, and this was reflected in our original forecast assumptions for the current year. As of today, it looks like our 1Q '20 move-in will end up a few or several thousand square meters short of our original target. Nonetheless, we should still be able to achieve 1Q '20 revenue and EBITDA growth in the mid- to high single digits quarter-on-quarter.

Looking forward, the situation is that we have a large amount of capacity and service ready and waiting for our customers to move in. Our customers want to move in, but there are still many operational limitation and uncertainties in their supply chains, particularly with regard to IT hardware. China appears to be on a path to recovery. But this will be affected by what is happening with suppliers inside and outside the country. Given the lack of visibility about the pace of recovery, we took the view that we should revise down our move-in assumption by several thousand square meters incrementally per quarter. We've not changed any other assumptions in our forecast. Putting this into our model, we are guiding for revenue of RMB 5.63 billion at the midpoint, implying 36.6% growth year-on-year and adjusted EBITDA of RMB 2.61 billion at the midpoint, implying a 43.1% growth year-on-year. These growth rates are around 5 percentage points lower than what we originally intended to guide. Our sense is that this guidance is conservative but appropriate in the circumstances. We believe that the risk to the upside is greater than the risk to the downside.

I mentioned already our CapEx guidance of around RMB 7.5 billion of which CNY 2.5 billion mainly relates to the pending acquisitions of BJ9, BJ10, 11, 12 and the building in Minhang District, Shanghai.

I'd like to reiterate that all of our fundamentals remain intact. Customers have not changed their plans. And despite the tough conditions, we expect our business performance to be highly resilient. We are as confident as ever about our medium and long-term growth prospects.

With that, I'll end the formal part of my presentation, and we'd now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line Yang Liu from Morgan Stanley.

[Yang Liu, analyst]

This is Yang from Morgan Stanley. I have 2 questions. The first one is for William on government policy. So we noticed that recently, the central government in China encourage the data center as a new infrastructure for the first time. And what are you expecting in terms of the future policy support? Can we see more power quota or more funding support or -- and whether this kind of policy will change the investment return profile in this industry?

And the second question is for the new booking target. I'm not sure if the acquisition announced in December last year, will this split to 2019 and 2020? Or is all of the -- around 20,000 square meter will fall to 2020 new booking?

[William Huang, executive]

Okay. I answered the first question. I mean -- yes, you're right. The first data center it's -- was categorized by the central government as a new strategic infrastructure in China right now. It's mainly driven by the 5G strategy, right? So I think the effect to us is now it's early -- it's still early to say what happened -- what the new policy will launch specifically. But what I -- we were invited by the central government to discuss how to help you guys, how to -- give them more advice how to get back the growth of this industry. So what I can tell you is that there's a broad topic we have discussed with the central government. I have to say we are the only data center vendor being invited.

So number one, I think what I can -- what we talk about is how to release some carbon quota in a Tier 1 market to release the supply a little bit, but government still have a concern about the total carbon quota deployment. So we have discussed how to -- appropriately to release some carbon quota to data center industry. Number two is, I mean we talked about some topics about -- around how to reduce the power cost in the future and how to reduce it, the loan interest rate. This is all discussed. So in general, I think it's positive for us, and central government want to help to develop this industry. But so far, as you say, now is the stage, it's too early to say some -- assume right now. That's my view, yes.

The second question?

[Daniel Newman, executive]

Yes. Last year, we entered into 3 acquisitions. Two were included as part of last year's new business. Guangzhou 6, closed; Beijing 9, we took over the way I described. The third acquisition, which we call Beijing 10, 11, 12, announced in December, we're working hard to close that hopefully by the middle of this year. So when we talk about our 100,000 square meter sales target for this year, it was the -- it will be 80,000 square meters organic and 20,000 square meters through that specific M&A deal. 80,000 square meters organic is significantly more than we've done before organic, and we believe that 80,000 square meters organic is sustainable. So that's the new normal. Beyond 80,000 square meters is either M&A or maybe some upside, yes.

[William Huang, executive]

Yes. I add one point. We also talked to the central government how to release -- how to close some inefficiency small data center, in-house data center, to enforce -- to force the use of professional data center like us.

[Operator]

Your next question comes from the line of Jonathan Atkin from RBC.

[Jonathan Atkin, analyst]

So Dan, you just sort of answered one of my questions, which was about 100,000 being the new norm. And I wondered, do you think you could potentially do more than that given the boost in demand that you're seeing from the current environment, either organically or through M&A? And then I wondered if we could also pivot a little bit to the changes that have been taking place at CyrusOne and any impacts on Board membership and just the overall relationship. I do know that Tesh, their new CEO, has spent a lot of time in China. But if you could maybe comment on CyrusOne, that would be interesting.

[Daniel Newman, executive]

Two -- yes. Can we do more, that's the first part.

[William Huang, executive]

Yes. I think we didn't change our view. Actually, last quarter, when we talked about the market demand, we're still on that view. The China data center market is accelerating. It's not -- it was not impacted by the virus because we believe the virus stuff is a short-term impact. So from the midterm and long term, we feel -- we still think the total market will accelerate. This is number one. That means we have the chance to do more in the future. But this year -- this first half year, maybe a little bit tough, but it will not change our view for the future market because we believe the digitalization is a -- it's an overwhelming trend in China, even in global market, right?

[Daniel Newman, executive]

Yes. The second one about CyrusOne.

[William Huang, executive]

The CyrusOne, I think the -- number one, we still maintain the relationship with CyrusOne. We still have some view, talk about it together. It will not change. Gary stepped down or anyone who -- we deal with the institution, not deal with the individual, right? So I think it will not change our relationship with CyrusOne. We still help each other. Tesh and Jonathan called me after the announcement. And Gary also -- we have the conversation with Gary. So I think the number one, we're not changing Board seat right now, and Gary is a respected professional in the industry. They -- always bring the valuable opinion for GDS. So we appreciate that.

And on the other hand, I think we -- as I said, we deal with the institution, not the person. So I think the CyrusOne and GDS relationship will be not changed.

[Jonathan Atkin, analyst]

And then I wanted to maybe talk about any -- or ask you, have you seen any differences in the pace of deliveries and construction by the rest of the industry? You talked about how the virus has affected you from essentially a labor standpoint and slowdowns related to that. But has that been affecting the competitors equally or more so? I'd be interested in your perspective on that.

And then you also mentioned, again, the increase in demand. And how does that influence your thinking about entering new markets? In the past, you've sort of alluded to a couple of new metros in China that you would think about investing in. Is the appetite for that equally as strong now? Or has customer demand trends changed your thinking on that?

[Daniel Newman, executive]

William, the first question was whether competitors have been affected like us or to a less or greater extent.

[William Huang, executive]

I mean the -- our competitors affected -- been affected...

[Daniel Newman, executive]

Have they been affected by -- in the current situation, have they been affected in terms of their construction time lines, their move-in and so on?

[William Huang, executive]

I think, in general, I mean the current situation is equal for all of our competitors, right? And I think this is number one thing. So the advantage for GDS is we have the scale. We are a more easy, more well managed internally, in my view, right? So in terms of other construction point of view, I believe we are -- we manage better than the other competitor. This is my view.

[Daniel Newman, executive]

Yes. On the second question from Jon, so whether we see increasing demand in other markets, new markets and whether we have appetite to go to these places.

[William Huang, executive]

Yes. I think we plan to go -- we are ready to go any new Tier 1 market, right? So we still didn't change our -- we didn't change our view. We will go to some new market. As we mentioned last couple of quarters, Hong Kong market, Chongqing market and something new like Nanjing and Hangzhou is our target in the future. And on the other hand, we also think about the -- based on our current installed base customer requirement. We are serious talk out -- think about how to go to the Southeast Asia.

[Operator]

[Operator Instructions] Your next question comes from the line of Colby Synesael from GDS.

[Colby Synesael, analyst]

From Cowen, yes. Two, if I may. Number one, I think you guys said in your prepared remarks, you gave some color on what leasing was looking like. I couldn't tell if you were talking specific to the first quarter or the second quarter, or both. But I was hoping you could kind of just dig a little bit deeper into what you're currently seeing.

And then secondly, as it relates to the move-in rate, and I appreciate that you're being more conservative in that number right now. But would you expect at some future point, and I appreciate you're not going to tell us what quarter that is or you might not know what quarter this is. But would you expect for all this to kind of catch up? In other words, would you expect, at some point, we're going to see a very sizable quarter or 2 to kind of make up, if you will, for the lost ground, considering these developments are actually still going on, and at some point, everything is going to get completed and ultimately get to a point where all the installs are kind of back on track? And if so if that's the case, would you expect then to see a notable impact on outer-year expectations? Or is this really kind of focused on a slower 2020, but by '21, we're kind of back on the trajectory that we may have previously been assuming?

[Daniel Newman, executive]

Yes. Good. Thanks, Colby. On the first one, as we near the end of the first quarter, we already know what we've done from a sales point of view in the first quarter, and it's -- we just said comfortably over 20,000 square meters organic. And we already have a, I would say, very good idea of what we're going to be able to do in the second quarter. On top of which, hopefully, the BJ10, 11, 12 acquisition will close in the second quarter, and that's 20,000 square meters there as well. So if you add all that up versus a full year target of 100,000, we said we're going to be a long way, which I -- yes, and certainly mean more than halfway, maybe quite a bit more than halfway towards that target. I just mentioned that because we know that as a fact and to give some confidence in what we are saying in terms of our sales targets.

The second part, yes, what you said is quite possibly be the case. We looked at different scenarios. We speak to our customers and listen to the other earnings calls. People are not predicting what the shape of the recovery is. We could have assumed there would be very little move-in in the second quarter and an enormous ramp-up in the third and fourth quarter. We just -- we decided in the end just to take a haircut to the numbers for each quarter, it's only a few thousand square meters. And the reduction -- the resulting reduction in revenue and EBITDA was kind of the same, whether you're looking at it V shape, U shape or whatever.

Interesting statistic that I'll throw out. The last, I guess, 5 or 6 weeks from just before Chinese New Year until a few weeks ago, there was no move-in. So the amount of capacity that was being utilized in our data centers was static. But during that time period, our customers' power usage went up by nearly 4 percentage points, which means in simple terms that they're running their servers at higher utilization rate, higher than normal and higher than they would normally do given their kind of operational parameters. And that's indicative of requirement to deploy more capacity. That's why we said customers want to move in. So it's really a question of whether they can. I believe that most of the current inventory of service has already been deployed. So the next wave of move-in is dependent on the production and the supply. If that comes through quite quickly or in size, then yes, I would actually expect quite a sharp ramp-up in move-in. And that might be what we described as risk to the upside.

[Operator]

Your next question comes from the line of Gokul Hariharan from JPMorgan.

[Gokul Hariharan, analyst]

Hope everybody is safe. Just first question on -- could you talk a little bit about, maybe William, on how you're seeing the dynamic of better-than-expected demand due to work from home and more digital consumption, et cetera, versus the relative lack of ability to execute on move-in or not having enough components? Like companies like Tencent also indicated yesterday that they are facing some degree of tightness in terms of some capacity, some hardware or the other. Can you talk about how your customers and you are dealing with this? And what are they doing to kind of mitigate that? Are there any kind of near-term measures so we're able to mitigate that? And how does that -- what are you expecting this -- how is it going to manifest over the next couple of months? I think are we kind of past the peak of that? Or are we still going to be in that kind of a phase in the next couple of months or so?

Second question I had was on some of your remote sites. I think if you can take Langfang as a case study, you already have one data center under service. Could you talk a little bit about how the dynamics are shaping up in terms of operating a data center in remote location and how you're able to manage capacity ramp-up and how the dynamics are for this kind of data center compared to a city center kind of data center?

And one last question, if I can -- if I may. On the financing side, I think you clearly explained where you stand in terms of availability of financing, both equity and debt. This is an industry which saw a lot of financing come in over the last couple of years for your competitors as well, especially private equity as well as other sources of financing. Can you talk a little bit about industry-wide in terms of what you're seeing on financing pipelines? Are they still intact? Do we see some degree of compression on financing on an industry-wide basis?

[Daniel Newman, executive]

William? Yes. First question -- sorry, go. First question was what can be done about the issues in the supply chain? Our customers got any solutions. We've got any solutions to...

[William Huang, executive]

Yes, customers dealing with the servers?

[Daniel Newman, executive]

Yes.

[William Huang, executive]

What's the question?

[Daniel Newman, executive]

Gokul was asking is there anything -- any solution to that problem? Is there anything that we can do...

[William Huang, executive]

We can do nothing, frankly speaking, we are not in this industry, right, server industry. I think what I heard about that is our customers try to get more server as much possible in the current market, right? So I think they have pushed a lot of the supplier to get some inventory in the other country or other market to try to mitigate the impact of the supply. That's what they are doing. But so far, we don't know what's the percentage of the target they can achieve, right? So in general, they are doing their best right now, what our customer told us. So looks like Q2, maybe we'll catch up the revenue a little bit. That's my view, current view.

[Daniel Newman, executive]

Okay. Second question is about operating Langfang. Maybe I'll go first, and William, you can add to that. Yes. So Gokul, the Beijing municipal government started to introduce restrictions on new data center approvals, I think, at the end of 2016. And it became apparent in 2017 that would not be possible to maintain sufficient supply to fulfill demand within the urban area. And we started then to work on the backup plan. I'd say it took about 2 years of discussion, interactions and so on with the Langfang government, resulting in a framework agreement, which addresses allocation of substantial amount of power, in fact, substantial amount of power, which is available in that area and the sale of greenfield land and investment.

That -- we chose Langfang because the telecom carriers had already established major data center hubs in that market. Therefore, the connectivity, at least from that part of Langfang, not the whole of Langfang, but that part into Beijing is very good. So in terms of latency, it's only a small drop-off versus the latency within Beijing. But in order to proceed, we really had to cover 2 bases. One was the government and one was our customers. We had to convince our largest customers because a place like this, you're not looking for just one order from a customer, you're looking for a customer to deploy a major amount of their own capacity.

So the end of the framework agreement, we're in a position to acquire the greenfield land and start the development, but we really got our customers wound up. So we found that we needed to accelerate our time to market. So in actual fact, the first thing we did was acquire the land for, which is for Langfang 3, 4 and 5. It should have been 1, 2 and 3. But because of the time-to-market requirement, we leased a number of buildings. We leased Langfang 1. We leased Langfang 2. We leased Langfang 6. We leased Langfang 7, and that's why we have 5 data centers in that area, all 100% committees. I mean going forward, the intention and the better approach would be have all of our development on the greenfield sites on the campus. So here, it was just out of necessity.

Your third question about financing. Yes. I'm clear about our own position. I mean we have access to the public market from time to time, but we also have access to partners and some very significant institutions, PRC institutions who have also expressed an interest in working with us. So I think there's a lot of scope in that approach to sourcing equity and other value add. As far as the competition is concerned, I mean no one is anywhere remotely close to our scale. There's been a limited amount of private equity participation by foreign PE and domestic PE. From the case histories of our acquisitions, there's quite a few projects that are being undertaken with no equity, and frankly, no formal debt either, just a reliance on credit from -- on suppliers. So I don't think that, on the whole, our competition is particularly well capitalized or financed, but I don't mean to damn them all. I'm sure that there are good companies amongst them.

[William Huang, executive]

Gokul, I added more color to the -- your second question. I mean in original, our plan is to supplement supply to the Beijing supply, right? I think the people -- because we realized -- a couple of years ago, we realized the carbon quota is getting more tight in the Tier 1 market in the urban city. And the demands are huge, right? So in the first original plan that we try to convince our customer to move a little bit, shift a little bit to the demand to the edge of town. But now customers and us realize those products is different. They have the same latency-sensitive criteria from our customers. But our customers want -- need a more big scale and a more big power capacity. They want to deploy more big power density. Now we realize this type of the campus and hyperscale campus is an independent product. This will fulfill our customer latency sensitive but a high visibility for the future supply and a hyperscale development and a hyperscale power capacity. This cannot be replaced in the urban town. That's my view. That said, now it becomes a new product in our view, right?

[Operator]

Your next question comes from the line of John Wang from Macquarie.

[John Wang, analyst]

Congratulations to the strong results. So I guess my first question is, in the past, GDS is doing a very excellent job in managing the financial leverages. I do see you guys are guiding a very -- a strong CapEx spending in 2020. I guess I want to follow up on the previous question on do we funding this CapEx purely from the loan -- bank loan side or we need additional equity reason this year?

And my second question is, so can management share some colors on whether the pandemic is actually helping or slowing down the utilization ramp-up in the first quarter?

[Daniel Newman, executive]

Okay. Dan, on the first question, our approach is to raise equity capital ahead of requirements so that as we initiate new projects, we can allocate from our -- the capital we have in hand to capitalize new projects on an individual basis. And we try to maintain around sufficient capital to capitalize around 2 years' worth of new projects. At the end of last year, we ended last year with CNY 5.8 billion of cash. I mean most of that effectively is the equity for future projects. I said that we would need about CNY 3 billion of equity for new projects in 2020. So that means we need to use about half of that. But then there's also operating cash flow coming through, so we -- it would look like we have sufficient equity to get us through 2 years.

The debt side, in normal circumstances, it's just about execution. It's about having relationships and a track record and sound project fundamentals and so on. The situation we're in, actually, is that we require about RMB 4.5 billion of additional debt to finance our CapEx this year. We already had CNY 2.5 billion of it in committed but undrawn facilities. And the remaining CNY 2 billion, actually, we're working on CNY 3 billion of new debt facilities right now, some of which are almost done. So there really isn't any financing risk to what we're planning to do at least over the next 1 to 2 years.

So the second question is whether the virus impact is actually slowing things down or speeding things up. I suppose -- I think probably you could say there's a difference between slowing things down in terms of move-in but maybe speeding things up in terms of demand.

[William Huang, executive]

Right. I think it's neutral. I mean they're moving a little bit, stay on the current point. What we can say is the server supply chain looks like uncertain, right? So it will impact our move-in -- our customer move-in this quarter or maybe a little bit of the next quarter. But what we can tell is in China -- inside China, the manufacturing is recovering right now, so I think a little bit positive for the Q2, as I mentioned just before. For the full year -- for the demand side, I think everybody knows this current situation led a lot of the Internet SaaS player, a lot of Internet player and a lot of e-commerce player, a lot of the application were well educated to the -- introduced to the market. So I think the long -- in the midterm, long term, maybe it will drive more demand in the future.

[Operator]

Your next question comes from Arthur Lai from Citi.

[Arthur Lai, analyst]

This is Arthur Lai from Citi. I have 2 quick questions, maybe to Dan. So the first question is can you talk about the contract renewal schedule. The reason we ask this question is we recall the IPO stage, you talked about contracts, sometimes 4 years or even longer. Are we in the middle of the negotiation with the clients? And dive into the detail in the Tier 1 city or in a retailer client, was the pricing trending up? Or can we get better EBITDA margin for the new contract? I will stop my question.

[Daniel Newman, executive]

Thanks, Arthur. On Page 36 of our earnings presentation, there's a summary of the amount of capacity which we have coming up for renewal in each year. In the current year, it's 23,000 square meters of capacity. It's 8.9% of our total committed area, and it's around the same -- similar level in each of the next few years. If you delve into the individual contracts and who are the customers, there's very little cloud or Internet business coming up for renewal. It's mostly enterprise business, and there's contracts 1, 3, 5 years. So they renew more often, and they renew automatically quite typically. So I think this question arises from analysts and investors. I know what you would like to get at, which is to see some benchmarks for what the pricing will be when we do get to renewal -- significant renewals with the large cloud and Internet customers, but that's not going to happen this year. So I wouldn't be able to give you any empirical evidence on that.

But going back to what William said about our kind of layout now, our configuration in terms of sort of downtown and edge of town. If customers don't want to pay the price for downtown, we have an alternative option in the edge of town. Certainly, we believe the downtown capacity has increased in value a lot and maybe our ability to achieve higher selling prices there. So yes, that is something which we can certainly offer to customers.

I think the second question was, yes, if you talk about the price, actually, you mentioned EBITDA margin. Actually, we have to talk about the price, together with unit CapEx and then in terms of return on investment. I mean for us, we look at it in a very fundamental way. So we talk about IRR. We can't really talk about it in terms of EBITDA margin because that doesn't really tell you what's happening in terms of project returns. So the unit CapEx has been coming down. I said the majority of it, the P&E, has been coming down by about 3% to 4% per annum. The MSR revenue per square meter, at least, in particular, like 2 or 3 years, has come down, I think, by about 5% per annum. So you can see that the degree of decline is quite close, and what that tells you is that actually our returns must be pretty well sustained if the yield and the investment costs are moving in line with each other. And that is indeed the case. So for IRR, from an NOI yield point of view, we're still achieving same kind of returns over the last 2 to 3 years, which is exactly what we target to do.

[William Huang, executive]

Yes. I can answer your question, I mean add more color on that. I mean number one, our customer now, they're -- how they look at the data center right now is the same view with us. Number one, they needed the urban town data center because in the future, any work adopted to the edge data center, so it will benefit for the edge data center demand.

On the other hand, edge of town always fulfill their mission-critical system, as we mentioned before. So I think the -- in the future, edge-of-town data center will be more valuable. If our customers like to low latency -- can tolerate a little bit latency issue and they want to have big scale close to the Tier 1 market, we can offer the edge-of-town product to them. If they want to just pursue the cost-effective, I think they already -- we already set a model to build to suit for that -- for our customers in the remote area, right? This is 3 different product which we structured. It's well structured to our customer.

[Operator]

Your next question comes from Frank Louthan from Raymond James.

[Frank Louthan, analyst]

Great. Can you -- looking back to your comments earlier on the government's position on data centers' critical infrastructure. Do you think -- will that new position make the industry more competitive? Is it going to encourage new entrants or relax foreign companies' ability to own and operate data centers? And then to your comment you just made sort of on pricing and your cost inputs, do you think your costs go up in the short term if labor is in short supply?

[Daniel Newman, executive]

The first one is whether the government policies could lead to greater, more competition?

[William Huang, executive]

So I think the -- our view is that if we -- if government release -- more flexible to release the carbon quota in a Tier 1 market, we believe -- if you look at GDS in the Beijing market -- for example, in the Beijing market, we lost a lot of deals the last couple of years because we constrained that carbon quota. So if the government released the carbon quota to more carbon quota, and we believe we will do more business, we get more market share in the Tier 1 market. Because if the carbon quota value is equal, that means customers will more focus on -- they are more focused on the value of the service provider. So our customer -- our major customer, they are now -- look at it as a service vendor, not just the capacity. They all -- they have a lot of different criteria. That means if the carbon quota value getting lower, that means that the other criteria will be more focused on from our customer. So we are well positioning in our other value, right? Dan, you want to add more?

[Daniel Newman, executive]

Yes. Frank, on the labor cost, I'm not sure if you're talking about the cost of revenue or how it affected construction costs. On the cost of revenue side, most of our staff head count by number is in data center operations. It's mid- to high single-digit percentage of our revenue, so it's not the biggest cost item. And it is one of the parts of our cost structure in which we get -- getting quite a bit of operating leverage because whilst there are certain number of people who have to be dedicated to each individual data center, there's also quite an amount that can be centralized, so we don't see anything out of the ordinary in terms of inflation there. Most of our people are back at work, actually. I think our data centers are pretty staffed.

On the construction side, the initial delays were caused by government restricting activities. And then once construction resumed, construction workers who came from other parts of the country had to go through quarantine. So it took some time for the number of workers on-site to reach the full complement. It's still not there. I think it's -- there's 25 -- 5,000 to 6,000 construction workers employed by our contractors across our 16 sites. Maybe 75% are back in place, so I don't think this is a fundamental shortage. It's just a transitory thing as people come back to their place of work.

[Operator]

As there are no further questions, I'd like to now turn the call back over to Laura for closing remarks.

[Laura Chen, executive]

Thank you all once again for joining us today. If you have further questions, please feel free to contact GDS' Investor Relations through the contact information on our website or the Piacente Group Investor Relations. Thanks all. Bye-bye.

[Operator]

This concludes this conference call. You may now disconnect your line. Thank you.